Factors of Production

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Transcript of Factors of Production

An economy, or economic system, is the organized way a nation provides for the needs and wants of its people. A country’s economic resources determine economic activities, such as manufacturing, buying, selling, transporting, and investing. Economic resources are all the things used in producing goods and services. Economists use the term factors of production when they talk about these resources. Factors of production are comprised of land, labor, capital, and entrepreneurship. -- Land and Capital (tangible) Labor and Entrepreneurship (intangible) Land Labor Capital Entrepreneurship Labor refers to all the people who work. Labor includes full- and part-time workers, managers, and professional people in both the private and public sectors. Land includes everything contained in the earthor found in the seas. -- RAW MATERIALS Capital includes money to start and operate abusiness. It also includes the goods used in theproduction process. Factories, office buildings,computers, and tools are all considered capitalresources. RAW MATERIALS that are processed into a useful form. Capital includes infrastructure, which is the physical development of a country. This includes its roads, ports, sanitation facilities, and utilities, especially telecommunications. Entrepreneurship refers to the skills of people who are willing to invest their time and money to run a business. Entrepreneurs organize factors of production to create the goods and services that are part of an economy. They are the employers of a population. Types of Economic Systems Nations must answer these three basic economic questions about how to use limited economic resource to get the goods and services the country needs.1. What goods and services should be produced?2. How should the goods and services beproduced?3. For whom should the goods and services beproduced and distributed? Traditional Economy - habits, traditions and rituals answer the basic questions of what,how,and for whom. Market Economy- No government involvement in economic decisions. Command Economy- In this system, the government controls the factors of production and makes all decisions about their use. 2. How? Traditional societies are underdeveloped.They produce what they need with simple,handmade tools and their ingenuity. 3. For whom? Traditional economic systems have a sense of community. Any excess food or other items that are made are traded among the residents. 1. What? Consumers decide what should be produced in a market economy through the purchases that they make. Products that do not satisfy consumers’ needs are not purchased and are not successful. They are no longer sold. 2. How? Businesses in a market economy decide how to produce goods and services. They must produce quality products at lower prices than their competitors. It is necessary for them to find the most efficient way to produce their good sand services and the best way to encourage customers to buy these products. 3. For whom? In a market economy, the people who have more money are able to use it as a medium of exchange to buy more goods and services. To obtain money, people are motivated to work and invest the money they make. 1. What? One person or a group of government officials decides what products are needed based on what they believe is important. 2. How? Since the government owns the means of production, it runs all businesses. It decides how goods and services will be produced. It controls all job opportunities and workers’ benefits. 3. For whom? The government decides who will receive what is produced. In principle, wealth is shared equally among all people to ensure that everyone’s basic needs are met. The idea is that all people are equal and are offered the same opportunities. 1. What? In a traditional economy there is little choice about what to produce. People produce what they need to survive. They use the natural resources in their habitat to do so. No economy is purely a traditional, market,or command economy. Every economy hasinfluences that make it at least somewhat mixed. Mixed Economies The United States is considered a mixed economywith leanings toward a market economy. In a pure market economy, there is no governmentinterference at all. However, there is somegovernment involvement in the U.S. economythrough the laws and regulations that businessesmust follow. There are also regulations to protectour food, air, and water supplies, and to protectconsumers from unsafe products. There are labor laws that determine at what age people can start working, and the minimum wage they earn. The U.S. government provides social programsfor those who need help, such as welfare andMedicaid for the poor and Medicare for the elderly. Business Cycle-Recurring changes in economic activity. Expansion- A time when the economy is expanding. Recession- A period of economic slowdown that lasts for at least two quarters, or six months. Recovery- The term that signifies a period of renewed economic growth following a recession or depression. During a depression, consumer spending is very low, unemployment is very high, and production of goods and services is down significantly.

Depression- A period of prolonged recession. THE ECONOMY AND MARKETINGLABOR PRODUCTIVITYGROSS DOMESTIC PRODUCT (GDP)GROSS NATIONAL PRODUCT (GNP)INFLATIONCONSUMER PRICE INDEX (CPI)PRODUCER PRICE INDEX (PPI)STANDARD OF LIVINGUNEMPLOYMENT RATE Productivity- Output per worker hour that is measured over a defined period of time. Gross Domestic Product (GDP)- The output of goods and services produced by labor and property located within a country. Gross National Product (GNP)- The total dollar value of goods and services produced by a nation, including goods and services produced abroad by U.S. citizens and companies. Inflation- Rising prices. Consumer Price Index (CPI)-Measures the change in price over a period of time of 400 specific retail goods and services used by the average urban household. Producer Price Index (PPI)- Measures wholesale price levels in the economy.